How to prepare for those inevitable financial bumps in the road

Wouldn’t it be sweet if all our retirement planning worked out exactly as we envisioned — no setbacks, snafus or foul-ups of any kind? Sweet, but unrealistic.

A new TD Ameritrade survey says that bumps and detours along the road to retirement are the norm, not the exception: two-thirds of Americans say their retirement planning has been disrupted by everything from major health bills to bouts of unemployment to divorce. The toll in lost retirement savings: an estimated $2.5 trillion.

Studies like this remind us of something we should already know but often forget: that we’ll have a better shot at weathering and recovering from financial disruptions if we factor them into our planning ahead of time.

Here are three ways to do just that:

1. Consider alternate realities. I’m not trying to go all sci-fi on you here. But it’s important to remember that just because you get an assessment of your retirement prospects by plugging your financial info into a retirement calculator — or working with a financial adviser — doesn’t mean the future will unfold according to the forecast. Real life has a way of throwing the proverbial monkey wrench into well-laid plans and making a mockery of projections.

There’s no way you can divine the future, of course. But you can run a variety of different scenarios in a retirement calculator to get a sense of how you might fare under assorted conditions.

So, for example, after running a base scenario with reasonable assumptions, do another that assumes much higher inflation or lower investment returns or a stock market meltdown on the eve of retirement.

Don’t underestimate the potential impact of a setback. The TD Ameritrade survey found, for example, that people lost five years’ worth of savings, on average, due to a financial disruption.

So be sure to run a couple of worst-case scenarios — say, an extended bout of unemployment during which you can’t save, a forced early retirement, a big spike in medical bills or other expenses in retirement that eat up an unexpectedly large piece of your nest egg.

2. Create a safety margin. Once you know how much a disruption could set back your retirement plan, look for ways to adjust your planning to stem the possible damage.

The first move to do this which comes into many people’s minds is to boost savings balances by investing more aggressively. Such a move may be okay if you’re currently invested very conservatively — huddled mostly in CDs or bonds, for example. But if you’ve got a well-balanced portfolio that jibes with your risk tolerance, taking a more aggressive stance could backfire, leaving you even more vulnerable to a market crash.

If you’re still working, the better course by far is to find ways to save more. Even if you’re in the home stretch to retirement, socking away even a few extra percentage points of salary each year can significantly boost retirement account balances, making it easier to recover from a setback.

And, in fact, when TD Ameritrade’s pollsters asked people who’d experienced a financial disruption what would most help others prepare for the unexpected, saving a greater proportion of income was the most popular answer (chosen by 44 percent).

If you’re already retired, spending rather than saving should be the focus. Ideally, you’ll want to look for ways of cutting spending without appreciably reducing your standard of living. By doing a retirement budget that divides your spending into essential and discretionary categories, you can gauge how much wiggle room you have and identify possible areas to cut ahead of time.

3. Take action quickly. Maybe you’ll be among the fortunate one-third of survey respondents who (so far at least) haven’t had their retirement planning disrupted. But if you do run into a problem of some sort, take corrective action quickly. Delaying in the hope that the setback may be temporary or that you’ll muddle through without making adjustments could dig you into a deeper hole.

The first line of defense is typically to reduce expenditures, which is what 79 percent of the people in the TD Ameritrade survey did (although 41 percent were able to limit cuts to non-essentials).

If you can lower outlays and still manage to save for retirement, great. But for most people, especially anyone who’s lost a job, contributions to retirement accounts are likely among the first things to go. Tapping savings should be a last resort, and if you are forced to dip into savings, pull money from non-retirement accounts first.

If you have no choice but to tap retirement accounts, then at least try to do so in a way that minimizes taxes and penalties. For example, you can always withdraw any annual contributions you made to a Roth IRA tax- and penalty-free; depending on your situation, you may be able to qualify for an exemption to the penalty for early withdrawals. (See IRS Publication 590-B for the rules on IRA withdrawals.)

If you’re retired and your nest egg’s value takes a dive, it’s especially important that you quickly review your retirement budget (the one I suggested you create earlier in this column) and identify ways to cut back on withdrawals.

Fact is, a hit to your nest egg, especially early in retirement, can dramatically increase your chances of running out of money during your lifetime. By using a good retirement calculator, plugging in your nest egg’s value and trying out various levels of withdrawals, you can get a sense of what level of spending you can reasonably expect to maintain without exhausting your money too soon.

Bottom line: You may not be able to avoid the little obstacles and setbacks that life throws your way. But by recognizing that you’ll likely run into such speed bumps, factoring them into your planning and reacting quickly and responsibly if they occur, you should at least be able to minimize their effect.

Walter Updegrave is the editor of RealDealRetirement.com, a site that offers easy-to-understand-and-follow advice on retirement and investing. Walter previously wrote the Ask the Expert column for CNNMoney.com and MONEY Magazine and has published four books on personal finance. If you have a question on retirement or investing that you would like Walter to answer online, send it to Ask Real Deal Retirement. You can follow Walter on Twitter @RealDealRetire and reach him at [email protected].@realdealretire